This Diversity-Focused Niche ETF Can Actually Be A Core Holding

Analyst Grant Wasylik sheds some light on a new and little-known ETF that favors companies with high levels of gender diversity among their ranks.

Research indicates it pays to invest like a woman.

In a 2013 report, Fidelity analysts observed the performance of 12.3 million defined contribution plan participants over 10 years. While returns were just about equal, women constructed portfolios that were less risky. Plus, women had higher employee deferral rates (8.3% vs. 7.9% for men), which helped boost their savings rate.

Reputable investment management company Vanguard studied 2.7 million IRAs. Vanguard analysts found women outperformed men by 3% during the 2008-’09 financial crisis.

In her book, Jones suggests the following reasons for why women make better investors than men:

Women have less overconfidence … less of a tendency to overtrade … lower testosterone … greater tolerance for market “noise” … and a more-consistent application of investment strategies.

I asked Jones: “If men could take any advice from women on investing, what could it be?”

Here were her recommendations …

Maintain a long-term perspective. It’s a more-profitable approach. Women trade less (single men trade 67% more than single women). And women are less likely to sell in a panic (10% less likely to sell at the bottom of the market crash). Men check their brokerage account two times more than women do.

Look for investments that are not the current “it thing.“ They often have lower volatility because they don’t have “the herd” driving prices up and down. Women have shown more of a tendency to avoid the herd.

Be realistic about opportunities. Avoid the overconfidence trap. Men have a larger tendency to be optimistic about investment outcomes. They overestimate expected returns. Women do a better job of matching expected results with actual results.

Implement rules to manage emotions. Many women traders use stop losses, position sizing and precise buying criteria to stay focused on — and not fall in love with — investments. These types of protective tools can save your portfolio from devastating losses.

You would think if there’s evidence of women being better investors than men … women would be more prevalent in the financial world.

But, that’s not the case.

Jones told me women make up roughly 5% of Wall Streeters who take risk with capital … less than 10% of U.S. mutual fund managers are women … and there’s an 80-to-1 ratio of male to female hedge fund managers.

And just as there’s documentation of outperformance by female investors, there’s also data showing company — and stock — performance can improve by having multiple females in the C-Suite.

McKinsey found companies in the top quartile for gender diversity were 15% more likely to have financial returns greater than their industry average. For instance, in the last five years, the 20 S&P 500 companies with the highest percentage of female board members have outperformed the broader index by an average of 3% per year.

MSCI (Morgan Stanley Capital International) concluded that companies with strong female leadership boasted higher returns on equity (ROE) than those without it. (10.1% ROE for companies with strong female leadership vs. 7.4% ROE for companies without a critical mass of women at the top.)

And another Morgan Stanley research report discovered companies with greater gender diversity produced slightly higher returns and lower volatility over the five-year period from 3/31/11 to 3/31/16.

So, whether you’re already using Jones’ techniques or not, there’s another way to put a female touch on your investment portfolio. And this one is about as simple as it gets due to a new ETF that focuses on gender-diverse corporate leadership.

I reached out to Jenn Bender, SSGA’s Director of Research for the Global Equity Beta Solutions team. She told me why her company brought this ETF to market:

“We wanted to give investors an opportunity to direct capital to companies that have demonstrated a commitment to gender diversity. At the same time, companies with greater percentages of women at the top have also been shown to demonstrate financial success, both in terms of performance and profitability. We see this as a win-win for investors and for diversity in corporate America.”

SHE tracks the SSGA Gender Diversity Index. This index is made up of large-cap companies that are leaders in their respective industry sectors when it comes to advancing womenthrough gender diversity on their boards of directors and in senior leadership positions.

According to SHE’s prospectus:

Companies are ranked within each sector by the following three gender diversity ratio-based criteria: (i) ratio of female executives and female members of the board of directors to all executives and members of the board of directors; (ii) ratio of female executives to all executives; (iii) ratio of female executives excluding executives who are members of the board of directors to all executives excluding executives who are members of the board of directors.

The Index comprises companies that are eligible for inclusion based on the ratio-based criteria and which have at least one female in one of the following positions in the company: Chief Executive Officer, chairperson, or member of the board of directors.

This methodology results in 180 current holdings. Here’s a sampling of companies that pass the test:

Source: SPDR SSGA Gender Diversity Index ETF Fact Sheet, 9/30/16

So far, SHE has garnered a fair share of interest. In just over seven months, the ETF has collected $275 million in assets. Granted, the lion’s share of that came from a $250 million allocation from the California State Teachers’ Retirement System (CalSTRS).

This year, SHE is slightly trailing the SPDR S&P 500 ETF (SPY) on a total return basis …

Source: YCHARTS

But I think there’s a strong chance this fund will pull ahead of the market over time. The index backtests have outperformed the S&P 500 by an average of over 3% per year since mid-2002.

SSGA is also putting its money where its mouth is …

To show its commitment to gender diversity, the company will direct a portion of its revenue to charitable organizations that partner with K-12 schools to address gender bias and prepare girls for future business leadership roles.

Due to its large-cap focus, this ETF can be used as a core position in a portfolio. Or if you’re interested in an ESG (Environmental, Social and Governance) or Impact Investing approach, it can also serve as a smaller satellite position.

Grant Wasylik is an analyst and editor for Uncommon Wisdom Daily — a division of Weiss Research.

Before joining the investment newsletter business, Grant worked as a portfolio manager, lead research analyst and head trader for a billion-dollar wealth management firm for 10 years. He also spent a few years working in a specialized risk-trading department at Charles Schwab — where he was the first-ever, external hire into this elite department. In his first stint in the securities business (after passing Series 7, 64 and 24 exams), Grant ran a margin department and supervised a trade desk for a discount brokerage firm.

Prior to coming to Uncommon Wisdom Daily, Grant was co-editor and chief analyst of The Palm Beach Letter for two years. This monthly publication — with over 70,000 subscribers — focused on safe, income-oriented investments.

Due to his vast investment experience, Grant has a deep contact list comprised of 300-plus mutual fund, ETF, index, hedge fund and other top-notch financial professionals. In addition, he receives special invitations to — and attends — several of the world’s top investment conferences each year.

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